Conservative hypocrisy about Obama's proposal to limit charitable tax deductions for the rich.

Conservative hypocrisy about Obama's proposal to limit charitable tax deductions for the rich.

Conservative hypocrisy about Obama's proposal to limit charitable tax deductions for the rich.

Moneybox
Commentary about business and finance.
April 15 2009 11:52 AM

Taxes, Widows, and Orphans

Conservative hypocrisy about Obama's proposal to limit charitable tax deductions for the rich.

Illustration by Mark Alan Stamaty. Click image to expand.

Should we use the tax code to encourage virtuous behavior, such as, say, charitable giving? And should we avoid making changes in the tax code that would discourage charitable giving at this time of charitable stress? These questions would seem to be a matter of principle: It's either a good idea or a bad idea. But it all depends on how you're using the tax code. If the change involves a moderate tax hike on merely rich people, some think it's a bad idea that would be the equivalent of kicking widows and orphans in the face. But if the change is a massive tax cut for a few really, really rich people that would reduce charitable giving much more, the very same people think it's a great idea.

President Obama has proposed limiting the deductions people in the top tax brackets can take for charitable donations. Here's how he described it in a news conference in March. "It just means, if you give $100 and you're in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you're writing off 28 percent." Donors still get a decent deduction, just not quite as big as they used to get.

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Now, the rich do account for a disproportionate share of charitable donations. And they are motivated, in part—but by no means entirely—by a desire to shave their tax bill. The Center on Philanthropy at Indiana University has concluded that limiting the deductions and increasing the top income tax rate, as Obama wants to do, would lower charitable giving only a little bit. "Our estimates suggests that if these proposals had been in place in 2006, total itemized charitable giving by households would have dropped by 2.1 percent," says Patrick M. Rooney, interim executive director of the Center on Philanthropy. That wouldn't be good, especially in this time of economic stress. But it, alone, wouldn't be catastrophic. And, as Rooney notes, "changes in personal income and wealth, both of which have declined in the past year, have a greater impact on charitable giving than do tax rate changes."

Of course, some people disagree. Ryan Messmore of the Heritage Foundation argues that this is no time to be doing anything to discourage charitable giving, even if only at the margin. "The President claims that his tax plan will only have a small negative effect on charitable giving," he writes. "Percentage-wise, this may be true, but the estimated reduction in giving means billions of dollars less each year for charities, especially if weak economic conditions continue." He notes that even the small reduction in donations "represents more than the annual operating budgets of the American Cancer Society, World Vision, St. Jude's Children's Hospital, Habitat for Humanity, and the American Heart Association combined." Sen. John Thune, R-S.D., similarly opposes capping the deductions, because it would hurt charities in this difficult time. Thune sponsored a "sense of the Senate" amendment to a bill that says Congress, rather than slashing the deduction, should "look for additional ways to encourage charitable giving, rather than to discourage it." And here's a typical right-wing blog post on the subject.

And yet, Thune and Messmore's colleagues at the Heritage Foundation—and plenty of other people in Washington—are also enthusiastic supporters of a change in the tax code that would likely have the effect of reducing charitable giving by three to six times the amount that Obama's deduction cap would. Back in 2004, the Congressional Budget Office, then run by (former McCain adviser) Douglas Holtz-Eakin, issued a report noting that while boosting the size of estates exempt from taxes from $750,000 to $2 million or $3.5 million would cut charitable giving by less than 3 percent, "permanently repealing the estate tax would cause a larger decline in charitable giving—of 6 percent to 12 percent." Why? It turns out the existence of the estate tax gives a powerful incentive to people to contribute to charity during their lifetime, and after they've gone.

But some of the same folks who express so much concern for the impact of the deduction cap on charitable giving don't seem to care much about the philanthropic impact of getting rid of the estate tax. You can search the steady stream of anti-estate tax literature churned out by the Heritage Foundation and not find too many mentions of the St. Jude's Children Hospital. Thune, in fact, has repeatedly argued for killing the estate tax without regard for the impact it would have on charitable giving. And in early April he was one of those who voted to approve, by a 51-48 margin, a Senate amendment sponsored by Sens. John Kyl, R-Ariz., and Blanche Lambert-Lincoln, D-Ark., that would boost the size of estates exempt from taxes to $10 million.

The uncharitable way to describe the variable attitudes toward the tax changes would be to brand Heritage and Thune as hypocritical. The more charitable way? These folks just care a lot more about tax cuts than they do about helping charities and will marshal the most effective arguments they can for their position. Even if it means trotting out the widows and orphans.